Comerica Economic Weekly

U.S. economic data from the last week of July show a good start to Q3, but likely lower GDP growth than we saw in Q2. The first estimate of 2014Q2 real GDP growth came in stronger than expected, at a 4.0 percent annual rate. Overall, it was a solid, if unsustainable, report. The solid component was real consumer spending, up at a 2.5 percent annual rate, well above the weather-beaten 1.2 percent growth rate for the first quarter of this year. The unsustainable component of the GDP report was the unexpected ramp-up in inventories. Real inventory accumulation for the quarter was $93.4 billion ($2009), which boosted headline GDP growth by 1.7 percent.

The U.S. economy added 209,000 payroll jobs in July, the sixth consecutive month of +200K job gains. This includes April and June when about 300K jobs were added. These are healthy mid-cycle numbers consistent with rapid improvement in labor market conditions and ongoing moderate GDP growth. Still, today’s job’s report was not stellar, and that may be good news for equity markets. After yesterday’s selloff, today’s jobs report does not put additional pressure on the Fed to accelerate its schedule for interest rate liftoff, which would be a damper on equity markets. The unemployment rate ticked up inconsequentially from 6.1 percent to 6.2 percent.

The Employment Cost Index for Q2 showed a stronger-than-expected 0.7 percent increase, suggesting that tighter labor markets are beginning to exert some inflationary pressure. Over the previous 12 months, the ECI was up a moderate 2.0 percent.

June income and spending numbers were good, showing support from recent strong job growth. Nominal income was up by 0.4 percent, as was nominal consumer spending. Data revisions show a stronger U.S. saving rate than previously reported. In June, the personal saving rate increased to 5.3 percent.

The ISM Manufacturing Index for July increased to 57.1, showing good and improving overall manufacturing conditions. The employment sub-index for July increased to a strong 58.4, setting up positive expectations for August manufacturing employment.

Construction spending for June dipped by 1.8 percent as both private and public spending eased. Private residential construction spending dipped slightly by 0.3 percent for the month. Private nonresidential was down by 1.6 percent. Public construction spending was a bigger drag, down 4.0 percent for the month possibly related to delays in Congress in securing transportation funding (now resolved).

Initial claims for unemployment insurance increased by 23,000 to hit a still-low 302,000 for the week ending July 26. Continuing claims for the week ending July 19 increased by 31,000 to hit 2,539,000.

The Federal Open Market Committee did as expected, voting on Wednesday to further reduce their asset purchase program by another $10 billion. The Fed remains on track to completely eliminate active quantitative easing at the end of October. There was no change to near-zero interest rate policy. We continue to look for interest rate lift-off in 2015Q2.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-01-14.